It's Tax Time Again (Part 1)

The annual American nightmare is once again beginning. It’s Tax Time in the USA.

“The hardest thing in the world to understand is the income tax.”–Albert Einstein

“I am proud to be paying taxes in the United States. The only thing is I could be just as proud for half of the money.”–Arthur Godfrey

“In 1790, the nation which had fought a revolution against taxation without representation discovered that some of its citizens weren’t much happier about taxation with representation.”–Lyndon B. Johnson

In my mind it is 1776 again. Let's start with a blank slate, and fix the bloated, broken tax code.

Like it or not, it is tax time again, so here we go again. This time it is an election year, and everyone has a new tax proposal. The Democrats’ proposals are simple – tax the rich with the same complex Tax Code we have today, but raise the rates, add surtaxes, and limit their deductions. For the Republicans, most are touting the case for simplification of the existing Code (good luck with that!), or a form of the Flat Tax, which would certainly (in my opinion) be an improvement. But not much of an improvement!

All the proposals have one thing in common; they are intensely complicated. Why, you might ask, is the Flat Tax complicated? After all, it simply applies a fixed rate to taxable income. Some Flat Tax proposals have a couple deductions; others have none. But they have 1 thing in common. They apply the flat rate to Taxable Income.”

You probably spend most of your tax energy finding deductions. But have you ever considered the complexity of determining your Taxable Income? Depending on your circumstances, it can be a major headache. Vast portions of the 73,000+ page Tax Code are devoted to the calculation of income. Most of this would have to remain intact.

Let’s look at the construction of the personal income tax return. The Form 1040 and it’s simplified cousin 1040EZ are used for individuals. Start with the Form 1040EZ, used by people who have no dependents and a only simplest tax situation. The lines include Wages, Salaries and Tips, Taxable Interest, Unemployment Compensation and Alaska Permanent Fund Dividends. These are derived from forms W-2, which employers must produce and send out early in the year.

The W-2 contains a large amount of information, including identification data, employer data, total compensation, compensation for Social Security, Medicare wages, tips that count for Social Security, Federal tax withheld, Social Security withheld, Medicare tax withheld, Allocated tips, Dependent care benefits, non-qualified plans data, information about benefits, state and local tax data, and ObamaCare information. The calculated total is called Adjusted Gross Income. From that is subtracted Personal Exemptions, and that result is Taxable Income.

From Taxable Income, the taxpayers goes to a chart that shows the amount of tax owed on the Taxable Income. Then, federal tax withholding, if any, is applied to that number to determine either the refund owed to the taxpayer, or the check the taxpayer has to write. Got it?

That is the SIMPLEST tax form Americans have! When the Form 1040EZ is no longer available to the taxpayer due to income limits, dependents, or other complexities, it starts to get really complicated.